Não, o teste não continua após a detecção do primeiro setor defeituoso.
Da página do manual smartctl:
selftest - [ATA] prints the SMART self-test log. The disk maintains a self-test log showing the results of the self tests, which can be run using the '-t' option described below. For each of the most recent twenty-one self-tests, the log shows the type of test (short or extended, off-line or captive) and the final status of the test. If the test did not complete successfully, then the percentage of the test remaining is shown. The time at which the test took place, measured in hours of disk lifetime, is also printed. [Note: this time stamp wraps after 2^16 hours, or 2730 days and 16 hours, or about 7.5 years.] If any errors were detected, the Logical Block Address (LBA) of the first error is printed in decimal notation. On Linux systems the smartmontools web page has instructions about how to convert this LBA address to the name of the disk file containing the erroneous block.