Configuration folders named default contain configuration files/settings specified in the Splunk product or default settings...

It does not matter whether setting overrides are placed in default or local folders. Both are equally acceptable since Splunk will merge all the files together into one runtime model after each restart.

Any settings to be overridden should be modified in-place wherever the setting was found originally. For example, if overriding a setting originally found in system/default, it should be overridden there to ensure that the desired value is used by Splunk.

Overrides should be placed in a folder named local, ideally within a custom Splunk app. This ensures the overrides are preserved upon product or app upgrade and will also be easier to maintain/support.

Try to store all configuration overrides in system/local folder to keep all configurations in one place. This ensures the modification has the highest precedence over all other configuration entries.