The definition of the volume form confused me whenever I read about it through a general relativity textbook. Perhaps it is better explained in Mathematics text, but I haven't taken a look at them. The volume form in general relativity is introduced through something called a tensor density. As far as I understand, tensor densities aren't really much different from tensors - they just come from looking at tensors differently. When physicists mean the form $dx^1 \wedge dx^2 \wedge ...\wedge dx^n$ is a tensor density what they mean is that in a new coordinate system $y^\alpha$, the form becomes $J dy^1 \wedge dy^2 \wedge ... \wedge dy^n$ where $J$ is the Jacobian determinant. However, the n-form is actually a tensor; the only reason it picks up the factor of the Jacobian is because we represent the tensor in terms of wedge products and not tensor products. We multiply the the square root of the metric to compensate for this factor. I understand this fairly well.
However, is the final volume form given by $\sqrt{-g} \text{ } dx^1 \wedge dx^2 \wedge ...\wedge dx^n$a tensor? It seems that the $\sqrt{-g}$ messes with the transformation law because it cancels the partial derivatives that come from transforming the n-form.
Yes, every $n$-form is a tensor, but what we actually need in this case is a tensor field, and note that the $n-$form you mentioned is defined for each point $p$. We need to consistently assign a tensor to each point of our manifold, and that is not an automatic feature of the wedge product of two functions.I think that is the source of the problem. $\sqrt{|g|}dx^{1}\wedge...\wedge dx^n$ (I'm using the absolute value because $g$ might not be negative for an arbitrary $n$) is also an $n$-form, so it will give you a tensor as well. But since, as you said, the $\sqrt{|g|}$ factor compensates the change induced by the jacobian, this may actually be used over a finite volume for integration (you need a measure for integration, and the integral of this measure can't depend on your coordinate choice). As I understand it, the formal statement is that the differential $n-$form you wrote is a density, and as such they may be used to define a measure on an orientable manifold, which is what is being done here.