I've tried and made a lot of paper clay this year. For the cellulose insulation clay I've followed Scott Stoll's recipe as given by Antrocks above. Yes, you can smooth it out a bit by either brushing on more paste or rubbing it down with some on your fingers or with your hands wet down. I found that if you mix in too much cellulose and go for a dryer clay it's like sculpting tunafish.

If you start with a wetter clay (less cellulose) its much easier to smooth. Either way, at best it dries looking somewhat like cement. The cellulose just gives a coarser texture. If it's a little drier to start, it's good for larger projects.
There are quite a few recipes out there if you're looking for a smoother clay to start. Generally I think you'll find that the finer your paper in your recipe, the smoother your clay will be to work with. My most recent I did last night is a modified recipe from ultimatepapermache.com via a Youtuber. this one calls for two rolls of toilet paper, soaked in water to separate, which is then broken down further with a hand mixer. Squeeze out the water, tear it into small chunks and grind it down as fine as possible with the mixer again. Mix with 2 cups pre-mixed drywall compound, 1-1/2 cups PVA glue and a small amount of kosher salt to keep mold from growing. As with the cellulose, watch out for how much paper you add. More paper = dryer/chunkier and not as smooth. You may need to add a little water if the mix is too sticky.
When you use the TP clay, smoothing it with a palette knife dipped in thin paste will give a really smooth finish. The lady at ultimatepapermache.com has a version of the recipe she uses in lieu of strip mache and applies with a knife directly to her armature. Experiment a bit to find out what works best for you. You can always dip a ball of too-dry clay into your paste and knead it into a moister material as you're working as well.
PF