I don't have a reference handy for this. This is how I've seen it done.

The top course of the larger block should be either solid or grout-filled CMUs to provide a proper bearing surface for the smaller block. Grout-filled CMUs would be used if the wall needed to have rebar running vertically through the cores to tie it together. The exterior of the wall should be flush and the step should be on the interior side of the wall. This is so that the waterproofing/dampproofing can be done properly on the exterior side of the wall.