Holy Moly that is so cute! Such an awesome kid, building her own realm. That she preserves her fantasy that well speaks volumes of you as parents.
I see the art just like you. It's a great way to learn about consequences. Luckily, Lily doesn't really get frustrated, she always finds a way to make things better for herself. If the picture of the dog didn't quite come out as she wanted, well, it's a picture of a horse now, or whatever resembles her drawing best. And on she goes, and the picture of the dog just happens later, or the dog is somewhere around, to be drawn later.