On the Server running WSUS, should HKEY_LOCAL_MACHINE\SOFTWARE\Policies\Microsoft\Windows\WindowsUpdate\WUStatusServer
be configured to localhost/itself?
Does WSUS honor the Windows Update Service's settings to synchronise, or will WSUS use a separate connection?
WSUS uses it's own settings. I have used this exact setup on several networks. WSUS pulls from an upstream server, approve the updates you want on your network, Windows Update Service queries WSUS and only downloads/installs those updates you approved.