The Socceroos came to Qatar as one of the favourites and will be fully expected to defeat Indonesia, who are the lowest-ranked team left at 146 in the world.
Indonesia's coach Shin Tae-yong said they will need "a miracle" as they compete for the first time in the Asian Cup knockout rounds.
But Arnold, whose side were more solid than spectacular in topping their group with two wins and a draw, had a warning for his players.
"In every aspect they can do better," he said, referring especially to the offensive side of Australia's game, having scored four goals in three group matches.
"When they do better the team does better, and I feel we are getting better.
"But the mindset and mentality in the most important thing," added Arnold, who said first-choice centre-forward Mitchell Duke was back in full training following a hamstring niggle.
With Duke spearheading the attack and Arnold at the helm, the Socceroos reached the last 16 of the World Cup in Qatar, giving eventual champions Argentina a fright in a 2-1 defeat.
Their power and doggedness has been one of the hallmarks of Arnold's side, and he called it "the Aussie DNA".
"We fight till we drop," said Arnold, asked if complacency was a danger against the underdogs of Indonesia.
"When you play for your nation and represent your country it does not matter who you play against.
"It's about doing your nation proud."
Indonesia squeezed into the last 16 as one of the four best third-placed finishers, winning one of their group games, against Vietnam, and losing to Japan and Iraq.
It is Indonesia's first time in the knockout rounds of the Asian Cup, at their fifth attempt, and has been touted by Indonesian media as the country's biggest match in a century.
"Australia are one of the best teams here and strong and powerful," said coach Shin, who managed his native South Korea at the 2018 World Cup.
"Those aspects are probably the biggest strengths of their team."
Shin, who had a stint as a player and assistant coach in Australia, said his side "don't have much of a chance of winning" and expects the Socceroos to have as much as 70 percent possession.
But he warned: "Even though Australia are a strong team, we are going to play with a strong mentality and we will never give up until the referees blows the final whistle."
