I don't see any real "plot holes" surrounding Cait Sith, unless you count the characters being so untroubled by a robotic, magical stuffed toy helping them out. It's not a "plot hole" if they simply didn't explain something fully...

I figure that he is, on some level, 'alive'. At the very least, carrying (or powered by) spirit energy, hence his ability to use materia. And much like FFX's Lulu and her dolls, we're never told exactly how Reeve controls his wee robot kitty. I figure it's something akin to a specialised version of the 'manipulate' materia.