Ms Badenoch, 44, came out on top in a two-horse race with former immigration minister Robert Jenrick, as decided by party members.
She had been the favourite to win the vote and replace former prime minister Sunak. The latter announced his departure as party leader after presiding over the resounding general election defeat on July 5.
Ms Badenoch said that becoming party leader was an "enormous honour", but that "the task that stands before us is tough".
"We have to be honest about the fact we made mistakes" and "let standards slip", she said.
"It is time to get down to business, it is time to renew," she added.
The combative former equalities minister now faces the daunting task of reuniting a divided and weakened party that was emphatically ousted from power in July after 14 years in charge.
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