Pi Hole not blocking any ads at client level or router level

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Your debug log shows that the Pi-hole is working normally. The output from the nlsookup is as expected - the client is using Pi-hole for DNS resolution (or was for at least that query).

Your router is the DHCP server, and it is passing out its own IP for DNS, rather than the Pi-hole IP.

*** [ DIAGNOSING ]: Discovering active DHCP servers (takes 10 seconds)
   Scanning all your interfaces for DHCP servers
   Timeout: 10 seconds
   
   * Received 300 bytes from wlan0:192.168.1.1
     Offered IP address: 192.168.1.170
     Server IP address: 192.168.1.1
     Relay-agent IP address: N/A
     BOOTP server: (empty)
     BOOTP file: (empty)
     DHCP options:
      Message type: DHCPOFFER (2)
      server-identifier: 192.168.1.1
      lease-time: Infinite
      netmask: 255.255.255.0
      broadcast: 192.168.1.255
      domain-name: "lan"
      dns-server: 192.168.1.1
      dns-server: 192.168.1.1
      router: 192.168.1.1
      --- end of options ---
    
   DHCP packets received on interface lo: 0
   DHCP packets received on interface wlan0: 1

Do you only see ads on certain browsers? If so, the browser might be using private DNS (DNS over https, typically) that would route browser DNS traffic around Pi-hole. This would be true even if the client OS is using Pi-hole for DNS.

Use the tools to determine where the ads are coming from, and to see if the DNS traffic from the client is even getting to Pi-hole.