Translation according to Wiki, with my comments in bracket:
A monk asked, "Does a dog have a Buddha-nature or not?"
The master said, "Not [Mu]!" (Paul's comment: The master was most likely imitating the barking sound of a dog: WO!)
The monk said, "Above to all the Buddhas, below to the crawling bugs, all have Buddha-nature. Why is it that the dog has not?" (Paul's comment: Obviously his student didn't get it! That means it showed that the student had not been enlightened. The koan is therefore a test rather than a tool!)
The master said, "Because he has the nature of karmic delusions". (Paul's comment: the master brushed him aside by giving him a Buddhism Canned-talk!)
Koan is similar to a famous trade-tool of the clinical psychologist: the Rorschach test. The nature of the two is both reflexive, directing back to the subject himself. Through its seemingly irrelevant "narrative", the mind is disallowed to follow its path of conditioned response, and is therefore forced to "reveal itself".
One major difference: it takes a lot of wisdom for the master to come up with appropriate (Surprise!) koans for his students. The psychologist has a much easier task in creating new inkblots in their Rorschach!