That would work also.
When Man/Auto is closed and Run/Stop is open, the Arduino is in control.
If Run/Stop happens to be closed at the same time, the arduino won't sink more than ~35mA if it should try & take the output Low.
When Man/Auto is open, Run/Stop close & open acts the same as Arduino High/Low.
Probably get more consistent results (current flow thru the LED) if th 4N35 pin 2 goes to ground, and you move the 220 ohm resistor between D4 and the Man/Autoswitch.