Kindly find the answers sent by the specialist consultant:
Yes, If customer cancels before order is fulfilled in NetSuite, refund errors out in connector.
We have 2 work arounds/options:
1. Go ahead and create item fulfilment record in NetSuite (do not ship the item) and then bill the order to create cash sale so that cash refund can sync in. This will have record in NetSuite of money being taken (Cash Sale) or refunded (Cash Refund).
2. When refund errors out in connector because cash sale is not available and order is not fulfilled in NS, close the Sales Order in NetSuite and cancel the refund in connector. You may have to record a journal entry for the revenue and refund