How do you handle the situation where the wrong movement disc is used for ship? I tend to either allow the movement if it is valid for the target, otherwise treat it as if the owner had played a red movement action with stress token (i.e., you can pick their valid movement).

Depends on the circumstance, in a friendly game, just make the move if allowed, if not, make the closest move that is allowed. In a tournie setting, not sure, but I'd probably look for a straight one forward 'as a confused pilot'.

I'd also ensure that my opponent agreed to that prior to a tourney game.

If a ship makes a move that it can not legally make, or makes no move (forget to give it a dial), then your oppenent picks a legal move for you. In the case of using the wrong dial, if the ship can normally make that move than it is not an illegal move. In the future you need to make sure to read the text on the dial and not take it for granted. I know I make that mistake from time to time only to realize the problem as I go to set up the next dial.

CPTMcMurphy said:

But what if the ship can make the move, but the colour is different?

I don't mind in friendly matches but I'll be running a tournament soon and I just need to pick a definitive ruling for this even if it occurs. I know I've had times where I've put the wrong discs out and haven't realised until the pilot activates. Not that it's something that occurs every round, just once every couple of matches. It wasn't an issue till I got Y-Wings and TIE-Advanced's and I can only see the chance increasing when you add extra ship types into the mix.

Try putting number markers on your movement dials like you would put on the ships bases and pilot card, If just learning the game or fine tuning, maybe let them take no action for that turn or shot or both or possibly let you pick there next move