Recently got issue from our client in which only one web site was having issue accessing all pages under /_layouts/ directory.

Error that pops up: /_layouts/_layouts/application.master does not exist

Issue we figured out was caused by a novice developer who used SharePoint Designer to change few pages under Layouts Directory on production box!

Issue Resolution that worked for us :)

1. Go to IIS Web Site that is having this issue and make sure that layouts Folder under web site has below icon:

In our case it was changed to a Gear Icon.

If it is a Gear Icon then you can right click and check this setting under Virtual Directory Tab:

Above is correct setting as it should be in ideal configuration, if that is not the case then you can reset it by clicking on Remove tab that would be enabled across Application name.

Hope this helps to avoid entire reconfiguration!