Is it permissible for my grandmother, whose husband passed away two months ago and who is 67 years old, to attend my small family engagement party, knowing that she is observing the ‘iddah despite some saying that it is not obligatory for her?

Your grandmother did well by observing the waiting period (iddah) after your grandfather's death, because age does not affect the obligation of the iddah. The texts are general, such as the Almighty's saying: "And those of you who die and leave wives behind - they, [the wives], shall wait concerning themselves for four months and ten [days]." And she is permitted to attend the wedding without adornment, while being obligated to spend the night in her own home.