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I travelled with a US citizen friend a couple of times to Canada (my home country) for a few days each time. We never had a problem at any border and, being Canadian, I don't know as much as I should about Canadian entry laws. My friend has a single DUI from a long time ago (less than 10 years at the time of our travels), and neither of us were aware that it was automatic grounds for denial of entry. I discovered the rule by accident during random web browsing, and it's now been more than 10 years since the DUI, so in the ordinary course of events, Canada would automatically forgive it if they were to try to enter now. But now I'm worried that my friend has broken the law by not disclosing what they didn't know they were supposed to disclose. Are there any penalties for this situation? What if, hypothetically, they were to try to apply for residency/citizenship at a later date, would this be grounds for automatic denial?

Are there any penalties for this situation?

YES

Immigration and Refugee Protection Act (S.C. 2001, c. 27)

Sanctions for Unlawful Entry and Overstaying

The IRPA does not specifically criminalize unlawfully entering the
country or unlawfully overstaying a visa. Both of these types of
actions, however, fall under the general prohibition against
contravening the law without exercising due diligence to prevent doing
so.

Crown prosecutors have discretion to try general IRPA offenses either
by way of an indictment or in summary proceedings. The distinction
between indictable and summary offenses is similar to the distinction
between felonies and misdemeanors in the United States, and a crime
that can be tried either by way of an indictment or in summary
proceedings is considered to be a “hybrid” offense.

The maximum penalty for a person who commits such a general offense as entering
the country unlawfully or unlawfully overstaying a visa is a fine of
$50,000 and imprisonment for two years, if prosecuted by way of an
indictment, or a fine of $10,000 and imprisonment for six months, if
prosecuted in summary proceedings. Crown prosecutors usually base
their decisions as to whether a defendant should be tried by way of an
indictment or in summary proceedings upon such factors as the
seriousness of the violation, the defendant’s intentions, and the
defendant’s prior record.

Most persons caught violating the general provisions of the
immigration laws are deported or ordered to leave Canada. CBSA
administers the detention and removal of illegal immigrants and
persons who overstay their visa.

I personally would not disclose a past transgression which is beyond the statute of limitations. Neither would I volunteer if I previously innocently provided inaccurate information that has never been discovered.

In his case he very likely was never asked anything like that so he didn't lie to immigration. There are likely thousands of Americans who cross the border into Canada a month who have the ghosts of DUI's present or past.

What if, hypothetically, they were to try to apply for
residency/citizenship at a later date, would this be grounds for
automatic denial?

That's long term travel/migration and is beyond the scope of this site. You can ask under Expatriates.