My homeschooled daughter and I have encountered a similar problem. The books she chooses for reading are often a little too challenging for her to successfully read out loud (and include every word - especially if it means correct pronunciation), but even without pictures, she still does very well on comprehension tests (of texts generally leveled for Middle School Students) even while I know she is dropping some words exactly as your son is doing.
Something to think about in regard to beginning reading: Stopping to sound out every word really does mess with fluency and comprehension. The more focused on each individual word he has to be, the less likely he is to understand the entire sentence, paragraph etc. In pure text, if they understand 85% of the words, they'll get the gist of the text. Add pictures, and they need even fewer words to attain understanding. The reality is that he has pictures there to fill in the meaning so he can still comprehend the story - and his brain is still "seeing" the word and getting experience with it (which, overtime, expands his vocabulary naturally). Even we adults, when reading silently, often don't really "read" every word. Good readers do drop superfluous words frequently. I understand he isn't dropping words because they are "extra," in terms of the adult experience, but in his context, they are extra gibberish he doesn't need because he does have the info from the pictures.
For those who are not homeschooling,kids gets reading assigned at school that forces the issue in terms of practice with sounding out and getting reading that is "at level." For these kids, the answer is simple, if you aren't forcing them to read the words they don't know, they won't feel the need to lie to you. Allow for skipped words, if that is what the child wants to do. Don't put him in the position where he feels the need to "lie" to you about what he is doing.
Now, I am not saying this means you should forget about it and never insist on reading that includes sounding out every word- that is also important! Since you homeschool, you must also provide this experience for your child. What I am suggesting, is finding a way to strike a balance and do both. So, here is how I think about and talk about reading with my daughter and it has generally worked really well to this point.
It is important to understand that we read for a variety of reasons. Even adults, read for pleasure, for information (news, street signs etc.) and for learning. Some of the reading we do "for school" is to expand vocabulary, some is to learn new information about a topic or how to do something. Some reading lessons are for the purposes of practicing the skill of reading - sounding out, gathering meaning from context, and increasing fluency. . . We need different kinds of books for different purposes.
Your son can know the learning objectives you have for his lessons (in fact, it often helps them meet those objectives sooner if they know what the objectives are) and he can help choose some of his lesson books if he keeps your objectives in mind while choosing them. By offering him understanding about why choosing leveled books while still allowing a measured amount of choice is likely to improve his outlook at least somewhat. It'd probably feel like a very nice compromise to him and engage him further in his responsibility for his education than most kids have the opportunity to be engaged. Perhaps he'd like to choose books related to a topic that interests him and do most of his "lesson reading" in non-fiction?
He'll know that when he is done reading the "other" book you "assigned" for him (or chose together with the purpose of reading practice in mind), he can go read his "interest" books his way. This eliminates his feeling that a lie will help him, because his lesson books will be chosen at an appropriate level and he knows ahead of time he needs to work through every word. Of course, this applies to lesson objectives that necessitate his reading every word. With subjects like science, maybe you can choose books one level up and take turns and have him do some of the reading while you do most of the reading. There are also a certain number of "classics" you may feel he needs to be familiar with, but that you can read to him and he can do comprehension activities about without actually having to physically do the reading. He'll also know that he can "read for pleasure" as part of his day when he can read out loud to you his way - no pressure.
For kids who attend a mortar and brick school, the teachers will generally assign the "lesson books." Parents then should only force a reading of every word and total comprehension for homework/schoolwork - but not for all reading. Over Holiday breaks (Winter or Summer) you can still incorporate a "reading for practice" session in the day, in addition to "reading choice" time if you want.
Because I also homeschool my daughter, ideas offered by Jeremy Miller and Ossum's Mom are great ones. Jeremy Millers list includes activities I use frequently and agree they are also a wonderful set of resources for you too. Your son could choose a Chima book for some learning objectives with these activities in mind and still not have to read absolutely every word. In fact choosing "words of the day" from books that are above his reading level is a fabulous way to expand his vocabulary and honor his favorite books at the same time.
The ideas offered by Jeremy were ideas I also used with students when I taught in a classroom, and they would certainly be appropriate over the summer break for any kid at home with mom or dad. In fact, it will help in preventing a "summer (back)slide." But I can also say, for kids who attend mortar and brick schools, they get A LOT of reading in school and the activities that go with it. The school day is filled with it, so activities like re-writing a story, or choosing "words of the day" at home too can become an exhausting chore for both child and parent since they are already doing that at school as well. Therefore, while school is in session, I recommend against them, and I certainly recommend against using them for everything your child reads - homeschooling or not.
I'd also like to recommend a few websites that are wonderful resources for finding book suggestions and sorting through the many books available out there in the world with/without your son while you search:
Lexile - while many kids haven't done the testing to have an assigned and up-to-date lexile score, you can approximate a score by age and grade-level if your child is of pretty average ability for his grade level. Then you can up the score a bit if the books listed seem too easy, or bump the score down just a bit if they seem too hard. This resource is wonderful for finding good books to read in topical interest areas or specific genres he takes a liking to, or you wish to use in your son's education.
What should I read Next? which helps find books your son might like based on the books you already know he likes - though it isn't "leveled".
Book Adventure This website helps you create "reading challenges" for your son. It has a catalog of books from which to choose that also have comprehension quizzes that go with them. You can also create your own quizzes - there are all kinds of helpful items. Often, there are reading contests in which you can participate as well, we did one to read "winter stories" when Alice was 4, and she earned Snowmen at Night as her reward.