Which type of securities is characterized by their backing from state or political subdivisions?

The type of securities that are backed by state or political subdivisions is known as municipal securities, which falls under the category of Type II securities. These securities are issued by local government entities or related organizations and are specifically designed to finance public projects, such as schools, highways, and other infrastructure.

Investors are often attracted to Type II securities because they offer tax advantages; the interest earned is frequently exempt from federal taxes and sometimes from state or local taxes, depending on the issuer and the investor's residence. This feature makes them particularly appealing for investors in higher tax brackets.

Understanding the characteristics of municipal securities is crucial for financial services auditors because it allows them to effectively assess the risk, liquidity, and return associated with these investment options, as well as their regulatory compliance.