I think it is a "bug" with Virtual WSUS Server & Client computers or with most low memory VM installations.
To get it to work, these are the steps at client computer:
- Open cmd with Administrator privilege.
- At command prompt, run "gpupdate /force".
- Go to Settings->Update & Security -> Windows Updates, click the "Windows Update" button.
- Very quickly, at command prompt, run "wuauclt /detectnow /reportnow" about 4 times.
- Go to "WSUS Update Services" console, detect & show computers.
The important missing step is to click "Windows Update" button before quickly run "wuauclt /detectnow /reportnow" a few times. I suspect BITS (Background Intelligent Transfer Service) affects the "wuauclt" under VM environment.