Schizophrenia is characterized by dysfunction in basic auditory processing, as well as higher-order operations of verbal learning and executive functions. We investigated whether targeted cognitive training of auditory processing improves neural responses to speech stimuli, and how these changes relate to higher-order cognitive functions. Patients with schizophrenia performed an auditory syllable identification task during magnetoencephalography before and after 50 hours of either targeted cognitive training or a computer games control. Healthy comparison subjects were assessed at baseline and after a 10 week no-contact interval. Prior to training, patients (N = 34) showed reduced M100 response in primary auditory cortex relative to healthy participants (N = 13). At reassessment, only the targeted cognitive training patient group (N = 18) exhibited increased M100 responses. Additionally, this group showed increased induced high gamma band activity within left dorsolateral prefrontal cortex immediately after stimulus presentation, and later in bilateral temporal cortices. Training-related changes in neural activity correlated with changes in executive function scores but not verbal learning and memory. These data suggest that computerized cognitive training that targets auditory and verbal learning operations enhances both sensory responses in auditory cortex as well as engagement of prefrontal regions, as indexed during an auditory processing task with low demands on working memory. This neural circuit enhancement is in turn associated with better executive function but not verbal memory.