My guess is that the line between fiction and reality is severely blurred for him, so the audience is led to the same confusion. As he watched Centipede II, he had become so infatuated and involved with the movie that he no longer knows the difference.
At the end of the movie, we see him watching the credits to the movie we had just seen. As the credits roll, does he actually hear cries of the young child, or are the cries still resonating in his head from the effect of the movie? Had he truly killed his mother and all those people, or was it just the psychotic character from the movie that he had closely identified with? From what I understand, he has no clue either.
This confusion could also account for all the impossibilities within the movie like not getting caught and other mysteries. Anything can happen in a movie, right? He was only reliving the scenes within his head as he watched and/or mimicked them.
"Okay I'm back now, what did I miss? Oh crap!" - God
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