Stories is one of the themes of the reboot King's Quest canon.
Background[]
Embellishments and Tall Tales[]
All stories told by Graham, and others characters are at least in some part embellished, or exaggerated (much like the film Big Fish). They may lack many specific details of what really happened simplified and let out for the sake of brevity. But many of this maybe because certain details are not simply important to telling a 'good story'.
Did Graham really stick people inside of his 'magic cape'? Or is that simply a mechanic of his stories? Did time travel really occur, or did Graham simply forget some details and have to revise his story on the fly? Did Gwendonlyn influence certain additions to the story like making Graham find secret areas, repeatedly blow on the horns, or jump into a bed over and over again.
So its not clear where 'storytelling' ends, and reality begins.
Losing his memories[]
Graham doesn't always fill in every detail because he is old and losing his memories. This is especially the case in the final chapter, when whole parts of his memories are missing. He starts regret not being able to tell Gwendonlyn all the details of his past (and memories that were just starting to come back to him) before he passes on.
Gwendonlyn is not interested in hearing about every memory or detail of Graham's life, but instead wants to remember the stories in the last form Graham told them to her before time runs out. She doesn't want distractions, tangents, and sidetracks ruining the stories as she was originally told by Graham (true stories or further embellishments).
In Chapter 5 Graham feeling panic and sense of paranoia about his shortned time on earth, gets sidetracked, and starts spouting about other memories in his life, he regrets not being able to tell Gwendolny beofre he passes. She is only concerned that he stay on track with the story he is currently telling, and doesn't screw with the stories as he already explained them to her, so she can 'hold those memories' for herself.
Fairy Tales[]
All the classic King's Quest games stories exist in the new universe as the embellished and retold versions of the true stories that did occur in the universe. They are often reflect the 'ideal' form and sometimes the most fantastical versions of the story rather than the 'true' nature of what really happened. As fairy tales they usually happy endings, and specific sense of good vs evil, with no moral gray areas. Where as reality is far more harsh and punishing. Things may not turn out so well. Life is bittersweet, and death happens.
Certain things like magic fruits and life extending spells may not exist in the real world, neither did events like Alexander returning to kill the three-headed dragon. Daventry was at peace while he was gone.
The Magic Mirror[]
The Magic Mirror is used as a story telling prop, playing out at least some of the scenes in a visual manner to Graham, and Gwendolyn, and others in the room. It allows them to see different choices being made, and sometimes change events.
While its not fully confirmed, by comments made by Graham and Gwendolyn their stories may in part have some influence on history of what actually happened. They might be somewhat aware of 'alternate' choices that could have been made thanks to the mirror's extra information. This largely only impacts the death scenes, however, and just requires them to reset the story back before Graham died in the story to try something different.
In the epilogue chapter Alexander and Valanice use it to watch their daughter's story from the castle.
Outside Evidence[]
Certain details of the stories themselves are confirmed outside the narrative of the story by artifacts, and sometimes other characters. In Chapter 3 and Chapter 4 for example, Valanice acknowledges that she once had a friend that later died while they were on the adventures. Valanice agrees that Graham should tell the story of how her friend passed away. Valanice's birthday in Chapter 3 also confirms certain details about the life of the Valanice chosen in the stories such as interest in music, or the interest in puzzles.
In Chapter 5 there is also each Tapestry of Time, along the hall that confirms some of the major choices that Graham made throughout his life including the mentor he chose, the eye he collected, and the type of character he became (Compassion, Wisdom, or Bravery). The story suggests these tapestries were made by Waddles before he passed away.
Finally inside of Graham's room are a number of items and artifacts that link back to characters Graham told about in his stories, and the final gift his mentors gave him before they passed away (Golden Arrow, Pie Recipe, and the Photographs), as well as many things that related to the death and memory of Achaka.
Gwendolyn the Storyteller[]
Towards the end Graham suffers a major accident, and cannot continue to tell his last story, and tells Gwendonly she has all the pieces to finish the story on her own. He convinces her to finish the story. Despite the fact that she has neer heard the story before, and doesn't really know what happened. Despite this she forges on building a story off of the details her Grandfather had already set up, in an attempt to bring closure to all of the threads Graham had set up in earlier stories.
While there is no way to know for sure if this is 'how things really happened', or if Gwen had help as she told the story or not (via the Magic Mirror or those around her). The point is not so much veracity of the story but the process of story tellling in the first place, the 'journey'. Can she tell a good logical story, that brings closure to everything.
In the epilogue Gwendolyn is either telling a story or monologueing while she is having the adventure.