My wrong assumption was that pressing the button actually tested something besides the bulb.
However, this still did answer the mystery of how the warning system actually functioned. But after reviewing Speedy Jim's K7 internal schematic
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then the Bentley diagram, the light has come on! ; - ) I believe the key concept is that the warning light comes on when one (and only one) of the two brake systems fails at a time. When this happens, a positive voltage passes down from the fuse block through the "normally open" contacts of the good system and back up the "normally closed" contacts of the bad system. This then supplies the necessary turn-on signal to the base of the warning light transistor via the 2.7K resistor. If both brake systems are good, or both bad, the signal cannot flow to turn on the warning light because of how the "F" pressure switches are wired to each other. I guess the VW engineers designed it as such because they figured the odds are low that both systems would go bad simultaneously. That's the way I see it, but correct me if I'm wrong.
Because the Bentley has such a bizzare way of representing K7, I couldn't see this without Speedy's schematic. Thanks Jim!
Deb 71SB