The problem is:

1. Mail notification does NOT work as per configuration of $g_notify_flags for custom statuses.
2. When hander (assigned to) of an issue is updated together with a status change, the mail heading sent to the new handler is "The following issue has been ASSIGNED", rather than being worded with the new status heading (e.g. "The following issue has been RESOLVED")

The bug is due to in function bug_update of ../core/bug_api.php, "bug assigned" check happening before "status changed" as listed below (the check should be the other way around):

            if ( false == $p_bypass_mail ) {                # allow bypass if user is sending mail separately
                    $t_action_prefix = 'email_notification_title_for_action_bug_';
                    $t_status_prefix = 'email_notification_title_for_status_bug_';

                    # bug assigned
                    if ( $t_old_data->handler_id != $p_bug_data->handler_id ) {
                            email_generic( $p_bug_id, 'owner', $t_action_prefix . 'assigned' );
                            return true;
                    }

                    # status changed
                    if ( $t_old_data->status != $p_bug_data->status ) {
                            $t_status = get_enum_to_string( config_get( 'status_enum_string' ), $p_bug_data->status );

                            $t_status = str_replace( ' ', '_', $t_status );
                            email_generic( $p_bug_id, $t_status, $t_status_prefix . $t_status );
                            return true;
                    }

The fix is simply to swap the order of the 2 if blocks around, so that "status changed" is checked BEFORE "bug assigned". The fixed code is as follows:

                    # status changed
                    if ( $t_old_data->status != $p_bug_data->status ) {
                            $t_status = get_enum_to_string( config_get( 'status_enum_string' ), $p_bug_data->status );

                            $t_status = str_replace( ' ', '_', $t_status );
                            email_generic( $p_bug_id, $t_status, $t_status_prefix . $t_status );
                            return true;
                    }

                    # bug assigned
                    if ( $t_old_data->handler_id != $p_bug_data->handler_id ) {
                            email_generic( $p_bug_id, 'owner', $t_action_prefix . 'assigned' );
                            return true;
                    }