It's a mess nonetheless. However, it remains a possible task. The question is really "HOW?!"
IMHO, you could rig something up like the way you describe, but I would stay away from vinyl. Going with, say, a cement siding would look better than those vinyl stuff. Of course, the budget may limit on what material you could get...
Secondly, you could also frame it out with 2x's and install your sheathing and (vinyl or cement) siding to that on the outside, while insulation (R13 batt), drywall/wood paneling, trim, and paint on the inside.
my 2 cents.