Yes, your files will transfer. Don't transfer system files. Those should be already generated when the user is created.
So for example, go into Documents folder in the old user folder, copy the files and put them into the new documents folder in the new user folder. Don't bring the entire folder over.
Without knowing how your sibling added the account and usage history, it is hard for me to tell how this happened. It looks like the account was added but was never verified. If the Mirosoft account is added properly, the "sign in as local user" option shoud be presented to you. And if the local user is set up properly, you should also have the "sign in with Microsoft account' option.