Specifically, I am looking for sources that address this issue/topic. Namely, if he spoke fluent Hebrew, as the Torah records his words, how did he know the language? If, on the other hand, he spoke only Egyptian, why/how was the Torah able to change his words and what would this mean for the approach that the Torah recorded (at least certain) events precisely as they occurred?
For example, one might conclude from the talmud in Sottah (36b) that (the old?) Pharaoh admitted to Joseph that he did not know Hebrew. The Ibn Ezra explains Moses's name in two ways (either in Arabic or in Hebrew), etc.
See more about this there.