First of all, the ceiling... That's a hard call to advise without seeing it. If it was my house, I'd probably leave the firring strips there, and be sure to tap into the ceiling joists wherever I could.
The wall... You can certainly build a 2x4 frame wall, insulate & drywall it. You'll be much happier with that than what you now have. If you leave the current insulation & paneling up, it'll provide a little more insulation, but make sure you take care of the mold first.