ISOs are typically NOT stored as squashfs, because ISO typically refers to the ISO 9660 standard filesystem and its successors that was specifically designed for use with cdroms, and later dvds, etc.
This is not to be confused with generic filesystem images, which could use any format (and typically use .img instead of .iso for a filename).
ISO filesystems are typically used when it is possible or likely that the image would be burned to a cdrom, or for bios compatibility for booting, either from a cdrom or a USB stick or some similar medium.
squashfs is frequently used in linux for read only images and is highly optimized for this use, including data compression and minimum size data structures, and low overhead. This could be used for a live disk image, but it would not be bootable, as only linux recognizes this format, and the computer's firmware would not unless it was also linux or had direct linux support. However, squashfs images are frequently found inside ISO live disks as a large file. In addition to compression, squashfs has the advantage over ISO format that it supports full linux filesystem standards (for read only filesystems) including file attributes.
Other formats (for example vfat or ext4) can also be used for filesystem images, although these formats are optimized for read/write disk volumes.