In fault detection and diagnostics, limitations coming from the sensor network architecture are one of the main challenges in evaluating a system's health status. Usually the design of the sensor network architecture is not solely based on diagnostic purposes, other factors like controls, financial constraints, and practical limitations are also involved. As a result, it quite common to have one sensor (or one set of sensors) monitoring the behaviour of two or more components. This can significantly extend the complexity of diagnostic problems. In this paper a systematic approach is presented to deal with such complexities. It is shown how the problem can be formulated as a Bayesian network based diagnostic mechanism with latent variables. The developed approach is also applied to the problem of fault diagnosis in HVAC systems, an application area with considerable modeling and measurement constraints.