Diagnostics and prognostics have a significant role in the reliability enhancement of systems and are focused topics of active research. Engineered systems are becoming more complex and are subjected to miscellaneous failure modes that impact adversely their performability. This ever‐increasing complexity makes fault diagnostics and prognostics challenging for the system‐level functions. A significant number of successes have been achieved and acknowledged in some review papers; however, these reviews rarely focused on application to complex engineered systems nor provided a systematic review of diverse techniques and approaches to address the related challenges. To bridge the gap, this paper first presents a review to systematically cover the general concepts and recent development of various diagnostics and prognostics approaches, along with their strengths and shortcomings for the application of diverse engineered systems. Afterwards, given the characteristics of complex systems, the applicability of different techniques and methods that are capable to address the features of complex systems are reviewed and discussed, and some of the recent achievements in the literature are introduced. Finally, the unaddressed challenges are discussed by taking into account the characteristics of automotive systems as an example of complex systems. In addition, future development and potential research trends are offered to address those challenges. Consequently, this review provides a systematic view of the state‐of‐the‐art and case studies with a reference value for scholars and practitioners.