Install the flashing directly on top of the plywood layer that serves as the base for the siding. Use a vinyl type of flashing that can be installed with adhesive, rather than a metal type that needs to be nailed in place. Nailed flashing can lead to eventual leaks due to the fact that a nail is penetrating the plywood.
Cut the tip off of a tube of silicone adhesive so that you have at least a 1/4-inch opening in the top and insert the tube into a caulking gun. Pull the trigger to dispense the caulking and run a bead along the backside of the L-shaped step flashing. Press the flashing into any inside corners that need to be protected and waterproofed. Cover the seams between pieces with more silicone.
Cover the flashing as well as the rest of the wall with whatever waterproofing is recommended by your siding manufacturer, which varies by the manufacturer and the type of siding you are using. Install the siding on top of that waterproofing layer to completely cover the waterproofing and the flashing beneath, leaving behind a finished surface.