On the SaniSoft blog, there's a post pointing out a bugfix and a new enhancement to the Auth component for the CakePHP framework in version 1.2 (part 1):
The auth component is supposed to handle the user login in your app but I was just not able to get that done and there have been similar complaints in the CakePHP mailing list. Since I wanted it *NOW* I had no option but to once again dig into the source - but - hey it is not so bad, they give you the code so that you can change it! right?
His patch involves changing code in two places in the AuthComponent::startup() method to handle the login correctly.