I always saw this scene as a way to show a contrast to how Michael turned out at the end of GODFATHER II. It demonstrated that wasn't always a cold, calculating, business-like Don. He used to be an idealistic and moral young man. The whole movie was a study of contrasts of Michael Corleone and young Vito Corleone. Since we don't see Vito as an evil man in the film, bringing him in at the end (and at a friendly family celebration yet) reinforces how Michael changed. Instead of being a family man, he became a killer of a member of his own family (Fredo).