In pretty much every mod out there and in all the vanilla content, the only sound file I see used are lossless, but large and bulky WAVs. Now I haven't tried it out myself yet, but I remember mp3 files were able to load correctly into the game, yet no one uses them for sounds.
So, are using WAVs some kind of generally agreed upon thing or is there some kind of engine limitation on it?

Other than sounding better, I don't think there's a difference. It's just preference.

You can also use .ogg.
I think Data and the content devs are just happy with .wav and don't see a need to change.

When I compare a high quality mp3 file to a high quality wav file, I don't really hear any difference, yet the wav file is at least 10 times larger. Haven't looked much into .ogg file, although I hear it's got slightly better compression than mp3.

CC can only support .ogg and .wav files. Generally .ogg is used for bgm and .wav for sfx.

WAV files are uncompressed, whereas MP3 and OGG files cut some of the sound information out using various techniques in order to get a smaller file size. As a result, they're smaller, but they also have lower quality.

For a short sound effect, the filesize difference between, say, a 5KB OGG and a 25KB WAV isn't enough to really justify the loss in quality, so we use WAVs. For longer files, that can mean a difference of several megabytes, in which case it makes sense to use OGG.

As for why we don't use MP3s, this should pretty much sum it up: