She was discovered in a room in the house in Carnarvon, some 75 kilometres south from where she went missing, about 1am on Wednesday by WA Police officers.
"One of the officers picked her up into his arms and asked her 'what's your name?'" Deputy Commissioner Col Blanch revealed.
"She said - 'My name is Cleo.'"
The girl has been reunited with her mother Ellie Smith and Ms Smith's partner Jake Gliddon.
A man from Carnarvon is in custody and is being questioned by police.
"This is the outcome we all hoped and prayed for. It's the outcome we've achieved because of some incredible police work," Mr Blanch said.
He thanked the WA community, volunteers and officers involved in the 18-day search for Cleo.
"We'll have more to say on the rescue of Cleo as the day unfolds," Mr Blanch said.
"For now - welcome home Cleo."
The girl vanished from a tent at the Blowholes campsite, about 950km north of Perth, after the family arrived on October 16.
She was last seen by her mother around 1.30am that night.
Carnarvon Shire President Eddie Jones says the local community will be "elated, thankful" as they hear the good news.
"It is wonderful," he told Perth radio 6PR, adding that he reckoned the government should give everybody the day off.
The search for Cleo captured national attention, including in NSW where the state's police commissioner on Wednesday recounted a conversation he had with WA Police Commissioner Chris Dawson after Cleo was found.
"He said when he got the call this morning he broke down and cried," Mick Fuller told Sydney radio 2GB.
"It's such an amazing story."
Mr Fuller praised WA Police for their "good old fashioned police work", adding he had feared the chances of finding Cleo alive were slim.
WA investigators spoke to more than 110 people who were at the campsite when Cleo went missing.
They sifted through more than 1000 calls to Crime Stoppers and trawled through vast amounts of materials for forensic clues.
They had also been searching for the driver of a car seen leaving in the campsite in the middle of the night before it was discovered the child was missing.
WA Police had suspected she was abducted by an "opportunistic" offender.
Police will hold a press conference later on Wednesday.
The state government had offered a $1 million reward for information to find Cleo.