I enjoy playing FE very much, and i have no problems beating the game. However, i dislike AI cheating, and it has been mentioned repeatedly that the AI only cheats when challenging+ difficulties are set.

I do not believe this to be true.

Here are screenshots on normal (AI) and normal (world) difficulty:

 As this game is a normal/normal setting, upon seeing the AI create a town right next to monsters, i glee in anticipation of the town being destroyed soon. 

What's this? Low level Emperor Karavox with 34 HP all alone... right next to a difficult wild monster? This is even better! The main hero and the town may both be destroyed in the next turn! Mwahahaha.

Wow... Emperor Karavox attacks and beats the monsters .. losing only 15 hp in the process. He must be amazing. Or the AI is cheating again...

Hey wait.. did that River slag just go around the town? He must be lining the town up for an attack. I mean.. it's normal/normal difficulty after all.

Doesn't appear to be behaving as designed to me. If this is a player "perception" problem, then fix this perception by providing visibility towards the mechanics.