When you read aloud to a child, that child is probably hanging on your every word. This attention improves the child's ability to discriminate between sounds, something called "auditory discrimination." A child who is having difficulty with auditory discrimination will confuse words that sound similar, such as "hat" and "cat." Pronounce every word correctly and read slowly to refine your child's ability to discriminate between and process sounds.
Reading aloud also improves auditory blending, or the ability to put sounds together to form words. The sounds you make to form words act as models that are used by the child's brain to perceive and form similar words later on. Children with certain learning disabilities are able to make letter sounds but unable to put those sounds together. When you're reading aloud, put your finger under the word you're currently reading and ask the child to look at the word above the finger. This allows the child to see the connection between the sounds letters make and how those letters form words.
A child's memory is also affected when you read aloud to her. As you read, the child's brain is being stimulated, which causes the order of letters in words and words in sentences to become implanted in her long-term memory. This ability to remember how to order sounds and words is called "auditory sequencing." Children who struggle with auditory sequencing have difficulty with such tasks as reciting the alphabet. Improve your child's auditory sequencing by reading a passage aloud and having her repeat what you read.
One of the important aspects of auditory perception is attention. If a child can adequately devote her attention to your reading, her auditory perception is more likely to improve than if she is distracted. The ability to pay attention to a single auditory stimulus while ignoring other auditory stimuli is called "auditory foreground-background differentiation." Children who have difficulty with this are, for example, unable to cancel out the sounds in the hallway when a teacher is speaking. Test and improve your child's auditory foreground-background differentiation by using background noise, such as television audio, when you're reading to her. Ask her questions about the reading material to see if she is able to properly attend to your voice.