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The warning system indicates an oil pressure problem. If the oil pressure monitoring system does not see the proper amount of oil pressure to lubricate and protect the engine it will illuminate the light and sound the light and sound the warning. This is a "fail safe" system, so if a sensor was to fail it would also trigger a warning. It "may" be a switch or wiring problem, but it could also be an oil pressure problem. I recommend you get it checked out as soon as possible. The oil pressure should be checked and the warning system tested. Serious engine damage could result from ignoring the warning, it's potentially serious, that's why it beeps.
VW has released a Technical Service Bulletin (TSB) concerning this issue. Here are the numbers for the latest TSB followed by my synopsis and description.
17 07 13
Aug. 17, 2007
A common issue on al 1.8T motors (AEB, ATW,AWM, AUG) in all VW an Audi models is commonly referred to as "the sludge issue". I believe some confusion lies is in the term "sludge". I have always taken issue with the use of this term to describe the condition. I think this is translation error from German to English. The issue is oil deposits, in the way of black flakey particulates, building up on the inside walls of the crankcase and crankcase ventilation system. If you remove the oil filler cap and look at the underside you will likely see the buildup of these deposits. Over time these particulates flake off and work there way down into the oil pan eventually plugging the oil pick-up screen. This restriction in turn restricts the passage of oil to the point where oil pump can no longer supply the specified quantity of pressurized oil to the system. The oil pressure warning system, picks up on this lack of pressure, illuminates the light and sounds the warning.
If this is the condition of your vehicle (light just started to come on) the engine has likely not been damaged. The first step is to confirm that there indeed is an oil pressure issue and not just a malfunctioning light due to a failed pressure sensor. If the light comes on every time the engine exceeds 2,000 RPM, this may be a sensor. If it only comes on after driving for a period of time, this would indicate possible plugging of the pickup.
After confirming that there is an oil pressure issue the extent of damage to the engine, if any, is determined by inspecting the camshaft journals (bearing surface) for any signs of lubrication failure. This is the first component to get damaged if oil starvation was excessive. If the journals are OK repairs would consist of cleaning the crankcase, replacing the oil pickup tube with strainer or pump/strainer assembly, replace oil feed line of the turbocharger, replacing ALL crankcase ventilation system hoses, pipes and pressure regulating valve as described in the service bulletin. Then a special engine flushing system would be hooked up to the lubrication system and flushing procedures would ensue. After which the vehicle would be restored to running condition.
Only synthetic oil with the VW 502 00 grade standard should be used as well as the larger oil filter specified by your dealer. Required on 2005 year models.
If upon inspection at least one camshaft journal is damaged, the engine and possibly the turbo charger would be replaced.
You should try and assemble ALL your receipts for oil changes, even if it‘s just receipts for oil and filters and some kind of a log indicating when you changed the oil yourself. If it was serviced at the dealer, better yet. Also if the vehicle was serviced at a dealer, they should have informed you of the recommendation to use only the VW 502 00 standard oil and larger filter. If you can prove the services were performed at the intervals prescribed in your maintenance booklet they should honor the 8 years unlimited mileage extended warranty for this "oil sludge" issue. If you do not receive satisfactory resolution, you can contact VW customer relations at 1-800-822-8987. They can best advise you on how to proceed.
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