Dende upgraded the Dragonballs to allow three wishes. However, if one of the wishes is a mass revival, then it can only do two. So technically everyone is right depending on the situation.

As for second round match ups: fighters will be matched against the fighter next to them in the bracket. This means:

David vs. Ultra-Dimension
Coco vs. Fenro
Guls vs. Light

Assuming Shady wins his fight it will be against the winner of the NPC fight.