Mr. Knightley, in fact, was one of the few people who could see faults in Emma Woodhouse, and the only one who ever told her of them: and though this was not particularly agreeable to Emma herself, she knew it would be so much less so to her father, that she would not have him really suspect such a circumstance as her not being thought perfect by every body. (Chapter 1)

Mr. Woodhouse assumes he is the fanciful and troublesome person Emma is referring to and Emma assures him she meant herself because Mr. Knightley likes to find fault with her in a joking way. She assures her father it is a joke because he would not enjoy the idea everybody does not think she is perfect. I think she senses some fault finding coming on from Mr. Knightley and is trying to prevent him from doing so in front of her father. Mr. Knightley then says, “Emma knows I never flatter her…” but instead of responding in kind or with some wit, Emma is “willing to let it pass” and changes the subject. Emma seems worried about upsetting her father but I think it is true that she does not like Mr. Knightley to find fault with her and she, just as much as Mr. Woodhouse, likes to think she is perfect. (;D)