How to Smooth
A dwarf must have the Stone Detailing labour active. Designate the area to be smoothed ( -> ). Note that this can only be done with natural stone — soil cannot be smoothed, and constructions are already considered to be smooth for most purposes.
Smoothed 'natural' ice has different names than regular smoothed items. The walls are 'straight' and floors are 'level'.
 Follow Up
After a natural stone surface is smoothed, it may be further improved by engraving. This increases the room's value, but, unlike smoothing, engraving has quality levels. A wall can only be engraved once (for floors, there is a workaround). Using only skilled engravers will result in higher room and fortress values. One way to achieve this is to have a limited number of dwarves with the Stone Detailing labour active smooth large areas of the fortress until the dwarves are experienced. Then, have those same dwarves engrave. The result will be high-quality engravings.
Smoothed walls are also a prerequisite for carving fortifications. Engraved walls can also be carved into fortifications, but the engravings will be destroyed in the process.