I did do this and need to add another 10-12 panels this year. Here is how I did it and they have held up great for 3 seasons.
1. Build 4x8 wall panel however the heck you want.
2. Go to Lowes, home depot, eBay, whatever and find painters drop cloths. You can get decent size light tan for about $20. I went with the tannish heavy burlappish ( is that a word ) kind. I just went with what I liked the look of.
3. I got furniture foam and made square cushions that I glued to the wall panel. I have a quilted look to my panel. I then covered the whole thing with the drop cloth. Then I took a heavy stapler and followed the quilt pattern to make it look like stitching. Lots of staples! But the finished panel looked stitched and has held up great. Then I distressed the seams and stitching to help add depth. For a ceiling I have another painters drop cloth.
4. For audio I have a Gore Galore Sanitariom track. I have a few straight jackets from Brian Demski Designs and I finish the whole thing off with a very erratic strobe light.
5. I think I may change the lighting in that scene this year because the erratic strobing is tough on my actors.
Good Luck. Hope that helps.