Updating older jQuery

A plugin provider today told me the problem my site is having with his plugin is related to an old version of jQuery that's built into my theme. In the functions.php file I see where the default jQuery is deregistered. And in the header file, 1.6.1 is pulled in from Google. I see the current version is 1.7.1. Is there some reason why the theme wouldn't just use the current version? Must the version be manually updated in the theme?

I also see where some other plugin loads 1.7.1 from my own wp-includes folder.

How should this work?