Define what is meant by a transaction being executed on an arm’- length basis. Next, consult Paragraphs 52-53 of PCAOB Standard No. 12. Explain why gains recorded on transactions with related parties would have greater inherent risk of being overstated.
An arm’s length transaction is one that is consummated in the normal course of business operations in an objective and unbiased manner between unrelated parties. Specifically, that the parties are dealing from equal bargaining positions, neither party is subject to the other party's control or influence, and that the transaction is consummated with fairness, integrity and legality.