How do you handle it when a close friend creates a work of art - a novel, a painting, a film etc., that is really dreadful, or just not very good? Oh, and you want to also keep the friendship intact.
A little white lie never hurts, OP.
If this is a dear friend, just say something nice (no need to overpraise).
Keep your mouth shut. Anyone who creates something and then asks for your opinion is looking for praise, not criticism.
When asked "What do you think?" it's best to say something neutral like, "It's very interesting. Tell me more about it".
Find something nice to say. Just do it.
It depends on why they asked for feedback.
I'm a professional songwriter in Nashville, and friends ask for feedback to their songs all the time. If they're professionals -- or aspire to be -- I always tell them the truth, because, if they're serious about wanting to be a writer, they need an honest assessment of their talents.
If they're just a weekend duffer, though, and did it just for fun, I would humor them and not be as honest.
But if they want to be a professional, honesty is always the best possible response.
Never audition for friends.
It makes both of you uncomfortable.
If someone is serious about wanting to be a writer, than let them join a writers group and get critical feedback that way.
First, you say something positive.
Then, you say what confused you or what you found problematic, but do not say it if you don't have concrete ideas of what would make the film/novel/painting even better. You have to be able to back up your point of view with some knowledge of the art you are discussing. Otherwise it's about liking or disliking something, which is not constructive.
Keep in mind that you have to think within the world created by the artist.
It should not be about what YOU would do if YOU were making this film/novel/painting.
People will listen as long as you put a positive spin on your thoughts: It's good, but it would help if you.../be even better if you... /be more engaging if you... /your great idea would be fleshed out more if you ... etc, etc, etc.