I agree that it might have been a lapse on Michael's part, but at the same time it is possible that Michael felt that a betrayal by his brother would be very unlikely, thus he decided not to keep a closer eye on his brother. At the party in GFII at the beginning we clearly see that Michael is agitated with his brother's inability to "control" his wife and from GFI and GFII we see that Fredo has been swept up in the Vegas life. I gotta suspect that Michael must've been agitated with Fredo previous to GFII, but never thought that his own brother would betray him.