I don't think it is a problem. Just because a book is a "picture book" doesn't mean it isn't well written, or at a high enough reading level. There are some very high level picture books available. Personally, I have found that my twins (first grade) enjoy reading picture books more than chapter books, partially because they have pictures and because they can be read in one-sitting.
For school purposes, I can completely understand why they would want the students reading picture books in K & 1. It sounds like the teacher is working on higher-level reading analysis skills with your daughter. My understanding is the next step is usually for the child to write the answers to the type of questions that your teacher is discussing with her now regarding the stories.
