Adeno-associated virus (AAV) is a non-enveloped DNA virus infecting a wide variety of species, tissues and cell types, which is recognized as safe and effective method for delivering therapeutic transgenes. AAV vector is the most popular viral gene delivery system in clinical delivery system with unique and multiple advantages, such as tissue tropism, transduction specificity, long-lasting gene expression, low immune responses, without host chromosome incorporation. Till now, four AAV-based gene therapy drugs have already been approved by the US Food and Drug Administration (FDA) or European Medicines Agency (EMA). Despite the success of AAV vectors, there still have some remaining challenges to limit the further usage, such as poor packaging capacity, low organ specificity, pre-existing humoral immunity, and vector dose-dependent toxicity. In the present review, we address the different approaches to optimize AAV vector delivery system with focus on capsid engineering, packaging capacity, immune response at the clinical level. The review further investigates the potential of manipulating AAV vectors in preclinical applications and clinical translation, which emphasizes the challenges and prospects in viral vector selection, drug delivery strategies, immune reactions in cancer, neurodegenerative disease, retinal disease, SARS-CoV-2, and monkeypox. Finally, it forecasts future directions and potential challenges of artificial intelligence (AI), vaccine, and nanobody, which emphasizes the need for ethical and secure approaches in AAV application.