diff --git a/sphinx/environment.py b/sphinx/environment.py
index ec65e5d241..5b92c03767 100644
--- a/sphinx/environment.py
+++ b/sphinx/environment.py
@@ -493,14 +493,14 @@ class BuildEnvironment:
 
     def warn_and_replace(self, error):
         """Custom decoding error handler that warns and replaces."""
-        linestart = error.object.rfind('\n', 0, error.start)
-        lineend = error.object.find('\n', error.start)
+        linestart = error.object.rfind(b'\n', 0, error.start)
+        lineend = error.object.find(b'\n', error.start)
         if lineend == -1: lineend = len(error.object)
-        lineno = error.object.count('\n', 0, error.start) + 1
+        lineno = error.object.count(b'\n', 0, error.start) + 1
         self.warn(self.docname, 'undecodable source characters, '
                   'replacing with "?": %r' %
-                  (error.object[linestart+1:error.start] + '>>>' +
-                   error.object[error.start:error.end] + '<<<' +
+                  (error.object[linestart+1:error.start] + b'>>>' +
+                   error.object[error.start:error.end] + b'<<<' +
                    error.object[error.end:lineend]), lineno)
         return (u'?', error.end)
 
@@ -590,12 +590,13 @@ class BuildEnvironment:
             def __init__(self_, *args, **kwds):
                 # don't call sys.exit() on IOErrors
                 kwds['handle_io_errors'] = False
+                kwds['error_handler'] = 'sphinx'  # py3: handle error on open.
                 FileInput.__init__(self_, *args, **kwds)
 
             def decode(self_, data):
-                if isinstance(data, text_type):
+                if isinstance(data, text_type):  # py3: `data` already decoded.
                     return data
-                return data.decode(self_.encoding, 'sphinx')
+                return data.decode(self_.encoding, 'sphinx')  # py2: decoding
 
             def read(self_):
                 data = FileInput.read(self_)
diff --git a/tests/test_env.py b/tests/test_env.py
index 11e73edfef..443f249c71 100644
--- a/tests/test_env.py
+++ b/tests/test_env.py
@@ -10,7 +10,7 @@
 """
 from six import PY3
 
-from util import TestApp, remove_unicode_literals, path
+from util import TestApp, remove_unicode_literals, path, with_app
 
 from sphinx.builders.html import StandaloneHTMLBuilder
 from sphinx.builders.latex import LaTeXBuilder
@@ -95,6 +95,20 @@ def test_second_update():
     assert 'autodoc' not in env.all_docs
     assert 'autodoc' not in env.found_docs
 
+
+@with_app(srcdir='(empty)')
+def test_undecodable_source_reading_emit_warnings(app):
+    # issue #1524
+    warnings[:] = []
+    app.env.set_warnfunc(lambda *args: warnings.append(args))
+    (app.srcdir / 'contents.rst').write_bytes(b'1\xbb2')
+    _, _, it = app.env.update(app.config, app.srcdir, app.doctreedir, app)
+    list(it)  # the generator does all the work
+    assert warning_emitted(
+        'contents', 'undecodable source characters, replacing with "?":'
+    )
+
+
 def test_object_inventory():
     refs = env.domaindata['py']['objects']