Indeed. As far as I know, the power limit can be set arbitrarily, and AI cars are tuned accordingly. If you go to the Event Synthesizer and then go to engine parts in settings menu before the race, you'll see generated power limit, which is commonly exceeds your car's power by couple hp. This system in particular implies that some cars are actually faster than same cars fully tuned by player. (for example, Nismo 270R and TRD2000GT are ridiculously quick in the straights sometimes). But strangely enough some cars always have fixed performance, for example Jag XJ220 and Lister Storm from All Stars - they seem to run like they have stock engines.
Also, there is an upper limit of possible power. I sometimes go racing with hybrids which do have sensible amount of power (so competition is still fair), but because of hybriding game sometimes thinks that these cars have about several thousand hp. So I could expect to race with like 3000 hp monsters, but I just get the fastest, but still usual AI cars: stock Elise GT1, Jag XJ220, Mine's Evo, bunch of tuned Skylines and so on.
Also I read somewhere around here that GT2's rubberbanding is actually just changing the power multiplier "on the fly", during the race. This can be illustrated if you take a fairly fast car (like Toyota GT1) to an All Stars race - you'll see, that some cars fall behind not as far, as some other cars; however if you spinout, or just take slower car to the same field, you'll see that the relative intervals between cars in the field change. In other words, some AI cars try to keep up with you harder than the others
Besides the power multiplier, there is a gear multiplier - the one that makes that Evo go over 330 km/h on Test Course; also AI use different tires. For example, in Sunday Cup everyone runs on Normals (surprise!), but in NA or Turbo Cup AI uses hard slicks; in GT300 or All Stars AI wears supersoft slicks.
However, I am not sure about the suspension upgrades in AI cars - basically the only way to judge is by body roll in replays, which is not accurate enough.