when your Atmega IC's takes an analogue reading, it compares the voltage measured at the analogue pin being used against what is known as the reference voltage. In normal analogRead use, the reference voltage is the operating voltage of the board. For the more popular Arduino boards such as the Uno, Mega, Duemilanove and Leonardo/Yún boards, the operating voltage of 5V. If you have an Arduino Due board, the operating voltage is 3.3V.
So if you have a reference voltage of 5V, each unit returned by analogRead() is valued at 0.00488 V. (This is calculated by dividing 1024 into 5V). What if we want to measure voltages between 0 and 2, or 0 and 4.6? How would the ADC know what is 100% of our voltage range?
And therein lies the reason for the AREF pin. AREF means Analogue REFerence. It allows us to feed the Arduino a reference voltage from an external power supply. For example, if we want to measure voltages with a maximum range of 3.3V, we would feed a nice smooth 3.3V into the AREF pin – perhaps from a voltage regulator IC. Then the each step of the ADC would represent around 3.22 millivolts (divide 1024 into 3.3).
Note that the lowest reference voltage you can have is 1.1V. There are two forms of AREF – internal and external