Questions like:
Why is the Z moving in this "simple square"?
In the control, is there a diameter value in the tool table for T1?
Is there enough of a move in N7 to APPLY said diameter value, really half of it?
With that said, I'm not sure if the Z move in the line that applies the comp (N7) is valid or not, but as Brian said, the history line should give some clue.
I'd suspect the issue is NOT in N4, but further down!!