This article is from the VW Technical FAQ, by with numerous contributions by Jan Vandenbrande others.
A: There are different ways to check engine compressions, and they can reveal
specific internal defects.
General procedure:
1) Remove all spark plugs.
2) Ground center spark plug wire AWAY from the cylinders
3) Make sure you have a healthy battery & the car is at operating temp.
4) Attach compression gauge on cylinder 1
5) Put car in neutral & have friend push in clutch & accelerator
6) Have friend crank engine, note FIRST reading and reading after
pressure stabilizes (3-5 cranks).
7) Note down readings and repeat for all cylinders
8) A healthy engine should have all readings near mfr's spec, and should
be about +/- 10% of each other. If not...you are in trouble.
9) If one or more is low, but not adjacent cylinders (e.g. 1 & 3)
suspect either a burned valve or worn rings. If adjacent cylinders are
low, also suspect a bad head gasket or a warped head.
10) To determine whether it's rings or valve, do a leak down test => Add
a couple spoon fulls of regular engine oil to the engine through the
spark plug hole of the offending cylinder
11) Repeat measurement. If it remains low => Valve/Head, else if the
readings jumped up => Rings.
12) To distinguish between head vs valves => see a professional. They'll
lock the drive shaft, put air pressure on the cylinders and watch for
bubbles in the coolant fluid.
13) Also the first reading and the final readings should not be too far
apart.
 
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