What audits financial reporting instruments and consists of two subclasses?

The correct answer highlights SOC 1 as the appropriate response, which stands for "System and Organization Controls 1." SOC 1 audits are specifically designed to assess controls that can affect the financial reporting of a client. These audits focus on the internal controls over financial reporting (ICFR) in service organizations, ensuring that the controls are adequate and working effectively.

SOC 1 consists of two subclasses: SOC 1 Type I, which evaluates the design of controls at a specific point in time, and SOC 1 Type II, which assesses the operational effectiveness of those controls over a specified period. This clear focus on financial reporting makes SOC 1 distinct and particularly relevant for organizations that provide services affecting their clients' financial statements, such as payroll processing or data hosting services.

In contrast, SOC 2 and SOC 3 are related to controls related to security, availability, processing integrity, confidentiality, and privacy, rather than directly addressing financial reporting. ISO 27001, while a widely recognized standard for information security management systems, does not fit the context of financial reporting instruments, making it an inappropriate choice in this scenario.