There are two steps, first you (not Etsy) must initiate a full refund. Click on the receipt number and select "issue refund" from the manage order drop down button. Once the refund has been issued you must go back into the order and select "cancel transaction" from the manage order section. It will ask you questions: did you issue a refund, did you contact the seller, select a reason, etc. Once you have completed BOTH steps then the order should eventually appear highlighted in pink in your open orders section.
At this point it does take Etsy a few business days to fully remove the order from your order open section. If you've already done this and it's not gone yet, Etsy may be a little delayed with all of the Holidays and high sales volume right now. If there's still a challenge you will need to contact Etsy directly about cancelling your order.
If you've issued a refund and not canceled the order, the customer can still leave a review.