I just removed a top tile from my bathroom wall. It was about half way up and it was rounded at the top. Underneath is cement and it sticks out about an eight of an inch from the plaster wall above it. Anyone hear of this before. So the round tile at the top was covering the cement wall that stuck out. Not sure if it's just cement board I can can remove to the studs and put up more sheet rock. We plan on painting the walls and we were hoping we could get it flush. If not we'll use a chair rail to cover the offset.
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Your easiest bet is to skim coat over the rough surface of the old mortar using a 12 drywall taping knife or a cheap concrete trowel. You can purchase thinset mortar for this. Use some bonding agent liquid on the old concrete first - let dry and then trowel on the thinset over it. Put down some cardboard on the floor and keep mortar like a milk shake consistency. Do about a 3'x3' area then move to next space. Use a spray bottle with water to spray over completed areas after about 5 minutes and trowel again which blends in each area and makes a smooth trowel slide over the thinset. After it dries 24hrs. you can then glue 1/4 or 1/2 thick drywall to this now smoother surface. Now rip a pc of wood to fit against the upper wall and flush with new drywall. Glue and nail this level across the top of new drywall. Apply molding over this so it has 1/4 reveal on top and hangs over the drywall top joint. Caulk nice and neatly and paint. If you try and bust off the old concrete/thinset mortar from the wall you are going to get into a big mess. There may even be wire lathe embedded in the thinset mortar. Big mess
90% chance it is cement board, and yes, you can take the steps you thought of..