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Padding a rough opening down to fit a smaller window is not usually a big deal, if it's within reason. Ideally, after you pad the opening down, you want about 3/8" - 1/2" of space around the perimeter of your new window to insulate. So you pad the rough opening in accordingly based on that. It sounds like you might be needing to add a 2x4 to each side of the opening or something like that. I like to run a bead of sealant between the original rough opening and any additional framing that is added so that you don't have any chance of air infiltration between the layers.
Once the rough opening has been resized, you may need to add some additional sheathing (plywood) onto the surface of the framing so that your window will be installed at the same level as the existing sheathing. Once that's done, you can apply some strips of felt paper, Tyvek, or a flashing tape such as Protecto-wrap, Grace Vycor, Tyvek Straightflash, etc. to the sheathing. This should be incorporated into the existing water-resistive barrier (WRB- your felt paper or housewrap- if you have such) that is protecting your existing sheathing so that the window will not leak, and so that your sheathing stays dry. Exterior trim is applied over this to cover the 1 1/2" - 2" gaps, but you would NOT just use plywood for your exterior trim, nor would you want to imagine that shutters or a flower box is going to help seal up the window opening and prevent it from leaking or rotting. Selecting something that does not need maintenance would be a better idea. Most big box stores sell PVC trim- either 2" brickmould, or 1x4 or 1x6 stock that can be cut down to the exact size you need with a table saw on site. If you don't mind painting, you could use white wood or cedar or such, but plywood just doesn't work well as a finished exterior trim.
After all that has been done, if you still want shutters or a window box, that's all fine and good. But your primary means of sealing the window, making sure it doesn't leak water or air (like Just Bill mentioned) is primarily your WRB, with some help from your exterior trim and head flashing.
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