Regardless of the File Sharing Settings and Permissions for a file, if the file is privately shared with users through records, it will not appear on any File and Content reports.
The behavior is working as designed. If the file is shared with the user directly, the user will see the file in the reports.
These reports are governed by the content document sharing provider and if a file is privately shared with a user through records, it will not appear in 'File and Content Downloads' or 'File and Content Engagement' reports.
Salesforce Idea - "File and content" report should display all files we have access to
000387669

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