My guess is that Reeve is hooked up to a VR machine that the optics are the stuffed Moogle's eyes since most pics of the cat has it's eyes closed. The audio is the cat's mouth, since I haven't seen the stuffed moogles mouth move much.

After the events, Reeve most likely was the pawn of ShinRa's actions. So that he was probably told what to do from a higher person, and probably was monitored at an extent.

That's my guess on Reeve's account.