You need to let the KeyDown event know that you don't want to do anything else with that key press.
Try adding
e.Handled = true;
i.e.
private void cbTest_KeyDown(object sender, KeyEventArgs e)
{
if (e.KeyCode == Keys.Up)
{
if (cbTest.DroppedDown)
return;
else
{
txtTest.Focus();
e.Handled = true;
}
}
}